2009 was the start of the global period of an economic contraction where we see multi national corporations take on a slump, abatement, bust, decline, depression, diminution, lull, pause, retreat, withdrawal, bankruptcy, collapse in their financial standings!

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Nov 10, 2008

Circuit City Seeks Bankruptcy Protection

Any retailer that was weak before the economic downturn appears likely to end up as one of its victims. The latest example is Circuit City, one of the nation’s largest electronics retailers, which filed for bankruptcy protection on Monday after months of declining sales.

The company said bankruptcy reorganization would help it win back vendors worried about being paid, and that a $1.1 billion line of credit would keep goods flowing to Circuit City stores through the crucial holiday season. But outside experts said the prospects of long-term survival for a chain in Circuit City’s position were bleak.

The company’s problems go back a decade, and it had long been faulted by Wall Street analysts for poor strategic decisions. The dismal economy of recent months finally sent the company over the edge. Analysts foresee similar bankruptcy filings by other retailers that turn in a poor performance this holiday season.

“The environment is the nail in the coffin, but Circuit City has been going through a turnaround for many years,” said Stacey Widlitz, an analyst with Pali Research.

In the 1980s, Circuit City was one of the nation’s strongest retailers. But then came a series of critical missteps.

“In the 1990s, they signed cheap real estate leases in inferior locations, and sealed their fate doing that,” Ms. Widlitz said. Many of the spaces were too big and made for an uninviting shopping experience. As its fortunes worsened, Circuit City laid off thousands of its most experienced salespeople last year to save money, killing morale at the stores and angering customers.

Meanwhile, analysts said, its archrival, Best Buy, secured better real estate, offered better service and adapted more quickly to a difficult marketplace for electronic goods.

Circuit City is still the nation’s second-largest dedicated consumer electronics retailer after Best Buy, with more than 700 stores. Last week it said it would close 155 of them, open fewer new ones, renegotiate some leases and cut staff members at its headquarters.

The retailer had been limping along for months, its shares losing more than 90 percent of their value since the beginning of the year. Sales for the three months ending in August fell 13.3 percent.

No liquidation of Circuit City is imminent; the company filed under provisions of the bankruptcy code that would allow it to keep operating while it revamped and sought fresh financing. James A. Marcum, vice chairman and acting president and chief executive of Circuit City Stores, said Monday that the company intended to live on beyond Christmas and to emerge stronger than before. He said the public could have confidence in doing business with the company.

“The decision to restructure the business ... should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively,” he said.

Most electronic products sold at Circuit City and other stores are backed by manufacturers’ warranties. Circuit City said it would continue to accept returns as before and to honor its add-on warranties, which were secured by third-party financial institutions, and its gift cards.

While Circuit City’s troubles mean that Best Buy can gain additional market share, that company will face stiff competition. Discount stores like Wal-Mart and Costco and the online retailer Amazon.com have become significant players in electronics sales.

Even in the best of economies, electronics is a difficult business. For one, the clock is ticking the moment a piece of technology hits the shelf. The more time passes, the more its value depreciates. Second, unlike a few years ago, it is not hard to sell a flat-panel television set anymore, said David A. Schick, an analyst at Stifel Nicolaus. Consumers are familiar with the features and many would rather sacrifice expert sales advice for a bargain at Wal-Mart or an Internet retailer.

In a down economy, only the best electronics operators survive.

“Every time the consumer has a hiccup or a slowdown, an electronics player goes bankrupt,” said Mr. Schick, ticking off bygone names like Crazy Eddie and CompUSA.

David J. Urban, a professor of marketing at Virginia Commonwealth University’s business school in Richmond, where Circuit City has its headquarters, said that making job cuts just before Christmas indicated Circuit City’s dire financial situation.

“The question is how much longer after that are they going to be able to survive?” he said. “If you have to do this to be able to ensure you’ll have adequate merchandise for the holiday season and its already the 10th of November, it’s not good.”

Stephen Hoch, a professor of marketing and the director of the Jay H. Baker Retailing Initiative at the Wharton School at the University of Pennsylvania, said it had become hard for retailers “to shrink dramatically and gracefully.” Many that get into trouble, he said, end up disappearing.